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Rating Action:

Moody's assigns Baa1 rating to new CSX notes

15 Feb 2018

New York, February 15, 2018 -- Moody's Investors Service ("Moody's") assigned a Baa1 rating to the new senior unsecured notes that CSX Corporation ("CSX") plans to issue. The net proceeds of the offering will be used for general corporate purposes, including share repurchases. The rating outlook is stable.

RATINGS RATIONALE

The Baa1 senior unsecured rating of CSX considers the company's position as one of the two major freight railroads in the eastern U.S. with a diversified freight mix and operating margins that are likely to continue an upward trajectory, to more than 34% in 2018 in Moody's estimates. CSX will also benefit from a material improvement in net cash flows relative to debt, due to the expected improvement in profitability, capital expenditures of only 14.5% of revenues and significantly lower cash taxes following the enactment of the Tax Cuts and Jobs Act. As a result, Moody's expects (retained cash flows minus capital expenditures)/debt to increase to well in excess of 10% in 2018, a measure that historically lagged median levels for the Baa rating category considerably.

CSX's recent announcement to increase its current share repurchase program to $5 billion signals a more aggressive financial policy that will cause debt/EBITDA to be in excess of historical levels of up to 2.5 times. Moody's considers this level of financial leverage very elevated, in particular given the company's still sizeable exposure to domestic and export coal of approximately 18.5% of revenues, and the concerns of the Surface Transportation Board about lingering service issues that emanated from the implementation of CSX's new operating plan. In addition, the company will have limited room to contend with any adverse developments in freight demand, freight rates, operational issues or any other challenges. Nevertheless, Moody's believes that the incremental risk associated with the increase in debt is mitigated by the expected material increase in cash flows relative to CSX's debt levels.

Liquidity is good. Cash flows from operations of more than $4 billion will be well in excess of CSX's planned capital investments of $1.6 billion and there are no material debt maturities in 2018 and 2019.

The stable rating outlook is predicated on Moody's expectation of flat total freight volumes in 2018 as well as CSX's ability to improve its operating margins and resolve its lingering service issues.

The ratings could be upgraded if operating margins are at least 35%, debt/EBITDA is maintained at close to 2 times and (retained cash flows minus capital expenditures)/debt is well in excess of 10%, whereas return on assets is more than 12.5%, measured by EBITA/average assets.

The ratings could be downgraded if Moody's expects operating margins to be less than 30%, debt/EBITDA to exceed 2.5 times while (retained cash flows minus capital expenditures)/debt is less than 10%, and return on assets to be less than 10%. The ratings could also be downgraded due to an inability to maintain network fluidity and good service levels.

Assignments:

..Issuer: CSX Corporation

....Senior Unsecured Regular Bond/Debenture, Assigned Baa1

The principal methodology used in these ratings was Global Surface Transportation and Logistics Companies published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

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Rene Lipsch
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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